Hard Time Ahead for Offshore Promters

The U.S. Congress and President Bush have recently passed a dramatic new tax law for U.S. persons. The most widely publicized elements of the new law is a cut in the top tax rate on long term capital gains from 20% to 15% and the inclusion of "qualified" dividends for the same reduced rates. I've written an extensive (35+ pages) report explaining the new law in English and offering my view on how the new law will affect a variety of investment and tax planning arrangements. I'm planning to make the report available by the end of June.

A summary explanation of the new tax law with information on how to order the report is available at http://www.offshorepress.com/vkjcpa/2003taxlaw.htm

One of the less obvious implications of this new tax law is that it's likely to reduce the appeal of offshore tax evasion for a lot of Americans. If I'm correct in my assessment, that will reduce the number of potential victims for various offshore tax scams and will drive some of the promoters out of the "business" of selling illegal tax schemes to U.S. taxpayers. For those who are engaged in offering legitimate offshore trusts or business arrangements, this could eliminate a lot of the shady players from the offshore market place.

Most of the offshore schemes being promoted to U.S. persons involve attempts to hide investment income from the IRS. A variety of devious and illegal methods are utilized -- which don't stand up if challenged by the tax authorities. Some of these schemes involve the use of foreign corporations, foreign trusts and foreign foundations.

Until May 6, 2003, the top U.S. tax rate on long term capital gains was 20%. Now it's just 15%. And for lower income taxpayers it's a low as 5% of the gain. In addition, the top tax rate on dividend income has just dropped from 35% to 15%. For lower income taxpayers it has dropped to 5%.

Due to other changes in the tax law from the Tax Relief Act of 2003, the level of income for taxpayers who are eligible for the 5% rate on long term capital gains and on dividends has increased. For example, a single taxpayer with an income of less than $36,500 will be eligible for the 5% rate on long term gains and dividends. For a married couple filing joint returns, the amount is $72,400. These amounts are based on the minimum standard deduction and might be greater if the taxpayer has enough deductions to itemize. It can also increase for each dependent child.

With a 5% tax rate on capital gains and dividends, the mere financial cost of most offshore schemes will far exceed the economic value of the alleged tax savings. Even those taxpayers who are not concerned about the prospect of being audited by the IRS will be deterred from participating in most offshore schemes because the benefits just won't be worth the cost.

But you might be thinking that offshore tax schemes are being sold to people in the lower tax brackets and that those in the higher brackets would cocntinue to find the offshore scams appealing. If you were paying a 35% tax on your dividend income and now could receive those same dividends with a tax rate of just 15%, would you be willing to spend a lot of time and money getting into some kind of complicated and questionable offshore scheme to hide your income from the IRS?

When you factor in the substantial risk of putting money into some offshore structure over which some promoter is given primary control, the prospective tax benefits just won't justify the added risk and cost of the scheme.

After the 1986 tax law reduced the top tax rate from 50% to 33% and then to 28%, I argued that the rate reductions alone would eliminate most of the more egregious tax shelters being promoted back then. I believe that the recent tax cuts for dividend income and cpaital gains will have the same inpact on the promoters of offshore tax schemes.

Meanwhile, I also anticipate that an increasing number of U.S. persons will seek offshore methods to protect their assets from predatory lawsuits and to establish a nest egg of savings outside of the U.S. -- just in case some future demagogue decides to make full use of all the powers the government now has over U.S. residents.

Vern Jacobs
June 19, 2003